AES Initiation Report

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Market Price (1/29/2016): $9.50/share; ST-Target: $17/share; NIV: $41/share

AES is at a critical strategic inflexion point: Is AES a growth vehicle?

AES is at a strategic inflexion point and should return to its roots as a power company: We would like AES to at least sell DPL’s T&D assets and use the proceeds to expand its power portfolio. Also, it feels to us that AES has been on a 12-year restructuring that seems destined to continue for at least another 6-12-months or so given its target to sell another $500MM by YE2015. Good news is AES appears to be exiting this journey; bad news is that its MT+ growth prospects don’t appear as robust as it was in the past, only managing a tepid 6%-8% growth beyond 2019, while 1-3 year growth prospects appear to be about 10%-12%. But, its tepid valuation seems to reflect more of the MT-LT prospects than ST-MT projections. We believe this may lead to a ST+ opportunity for AES investors through the anticipated rise in power prices over the next several years, keeping in mind that the LT challenge for AES is to accelerate its bottom-line growth to at or above 15%/year. The best opportunity for this turnaround, in our opinion, lies in Mexican opportunities. Regardless, we believe that an 8.7x on our 2016E AEPS is unwarranted and feel that AES should trade closer to ~$16-$17/share or at about 14.0x-15.0x on our 2016E AEPS.

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